Chart-catching

Over the coming months our Insights page will bring you a series of charts that have caught our eye.

US Investment vs Consumption

Source: Factset/Waverton (31.03.47 to 12.09.16)

The chart above shows Consumption (grey line) and Investment (green) as a percentage of US GDP, and displays some of interesting dynamics.

First, the consumer is becoming an increasingly important contributor to US GDP, representing c.70% in 2016, versus c.63% in the mid-90s.  Second, the general trend has been for both investment and consumption to rise over time, however the lines have begun to diverge, with investment turning down while consumption continues to rise.  Finally, and perhaps more ominously, looking back to the 1940s, more often than not the economy falls into recession (grey bands) when investment falls as a percentage of GDP.

A couple of comments

While an increasing reliance on the consumer is often coincident with market development, an economy cannot rely on this subsector forever.  What’s more, households took on debts and brought forward consumption before the Global Financial Crisis (GFC), meaning they now have to spend some of their current earnings on paying back these debts, in turn limiting their ability to consume.  It is therefore unlikely that consumption will continue to grow as a contributor to GDP.  Indeed, we could see the trend reverse.

Investment has also been (at least partly) driven by credit expansion: easy money pre-GFC followed by loose monetary policy post-recession contributed to increased investment, particularly in the energy space.  The downturn in the oil price in mid-2014 has since filtered through to lower investment spending by exploration and production companies, amongst others, as reflected in the chart.  Given that the contraction in investment is relatively narrow (that is, mainly confined to the energy space), and with the oil price recovering to a $40-$50 range, there is reason to be optimistic that, on this occasion, falling investment does not lead to an outright recession.

 By James Mee 

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